Financial Stability Oversight Council Issues Key Report Declaring Climate Change as an Emerging Threat to U.S. Financial Stability

On October 21, 2021, the Financial Stability Oversight Council (“FSOC”), established in 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act to reply to rising threats to the soundness of the U.S. monetary system,1 launched a Report on Climate-Related Financial Risk (the “Report”).2 The Report was revealed in response to President Biden’s Executive Order 14030 (the “Executive Order”), which acknowledged that the “intensifying impacts of climate change present physical risk to assets, publicly traded securities, private investments, and companies—such as increased extreme weather risk leading to supply chain disruptions,” and established the coverage of the Biden Administration to “advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk[;]” “act to mitigate that risk and its drivers, while accounting for and addressing disparate impacts on disadvantaged communities and communities of color[;]” and “achieve our target of a net-zero emissions economy by no later than 2050.” The Govt Order required the Secretary of Treasury, as the Chair of the FSOC, to difficulty a report on the FSOC’s actions to tackle climate-related monetary dangers.

Within the Report, the FSOC declares local weather change as an rising risk to U.S. monetary stability. The Report offers 30 suggestions to U.S. monetary regulators to assist mitigate that danger, specializing in 4 key initiatives:

  1. “Assess climate-related financial risks to financial stability, including through scenario analysis, and evaluate whether revised or new regulations or guidance is necessary to properly account for these risks[;]”

  2. “Promote enhanced climate-related disclosures[;]”

  3. “Enhance climate-related data to allow better risk measurement by regulators and the private sector[;]” and

  4. “Build capacity. Analyzing all this information and coordinating the response among the Council’s member agencies requires more resources.”3

The FSOC will prioritize enhancing cooperation with worldwide boards, addressing the wants of susceptible populations, and constructing on present local weather change mitigation efforts.

The Report additionally proclaims the creation of a Climate-related Financial Danger Committee to facilitate coordination amongst FSOC members and the event of frequent approaches and requirements. As well as, the FSOC shaped a Climate-related Financial Danger Advisory Committee, which can deal with gathering information to assist the FSOC tackle climate-related monetary dangers.

The Report didn’t advocate climate-related capital necessities for banks or limits on financing to fossil gasoline corporations, nor did it present any particular timelines for regulators to act, which has been the topic of criticism from environmental teams.4 A senior Treasury official famous, nevertheless, that the Report is “the first step, and we expect further action going forward” and that “[t]his is like the starting gun going off for the U.S. financial system.”5

Every of the 4 key initiatives, whereas seemingly easy, are extraordinarily complicated.

  • State of affairs evaluation, e., understanding how the bodily and transition dangers and alternatives related to local weather change will impression a enterprise over time is dependent upon consideration of a number of inputs. These embrace decisions of situations themselves, time horizons, supporting information, assumptions round expertise improvement, useful resource utilization, financial situations, and the timing of potential impacts. Even considering that every enterprise is exclusive, the extent of judgment and discretion entailed within the huge variety of selections that issue into state of affairs evaluation, coupled with a scarcity of standardization of what that evaluation ought to entail, essentially raises questions relating to the extent, reliability, and accuracy of every firm’s evaluation.

  • To be helpful to traders and regulators, local weather change disclosure wants to be constant, dependable, and comparable amongst corporations and industries. As we beforehand have mentioned, there aren’t any necessary or accepted international or U.S. requirements for reporting materials local weather change points.6 Varied frameworks do exist, and a few, like these issued by the Financial Stability Board’s Activity Drive on Climate-Associated Financial Disclosures, seem to be gaining rising traction amongst issuers. However the present state of play stays that huge disparities proceed within the high quality and thoroughness of local weather change disclosure right here and overseas.7

  • With respect to climate-related information, a plethora of metrics are being issued by numerous establishments, however once more, none has gained widespread acceptance. Examples embrace MSCI and Sustainalytics.8

One hope is that the upcoming United Nations COP26 Convention in Glasgow beginning October 31 will facilitate advancing these points by way of international cooperation and a spotlight. However even with such cooperation, the areas highlighted by the FSOC Report will stay works in progress for the foreseeable future.

1   The FSOC is comprised of ten voting members and five nonvoting members, who have financial regulatory experience, plus an unbiased insurance coverage professional appointed by the President. Financial Stability Oversight Council, U.S. Dept. of the Treasury,(final visited Oct. 25, 2021).

2   See additionally Press Launch, U.S. Dept. of the Treasury, READ OUT: Financial Stability Oversight Council Meeting on October 21, 2021 (Oct. 21, 2021); FSOC, FACT SHEET: The Financial Stability Oversight Council’s Response to Climate-Related Financial Risk (Oct. 21, 2021).

3   Press Launch, U.S. Dept. of the Treasury, Remarks by Secretary Janet L. Yellen at the Open Session of the Meeting of the Financial Stability Oversight Council (October 21, 2021).

4   Steven Mufson & Maxine Joselow, Biden administration warns that climate change poses risks to financial system, The Wash. Publish, October 21, 2021

5   See Press Launch, Bd. of Governors of the Fed. Reserve System, Statement of Chair Jerome H. Powell on the Financial Stability Oversight Council’s (FSOC) Report on Climate-Related Financial Risk (October 21, 2021),(“Climate change poses significant challenges for the global economy and the financial system. The public rightly expects us to work to ensure the financial system is resilient to climate-related financial risks. We appreciate the magnitude of the challenges ahead of us and the Federal Reserve is committed to doing our part. I want to thank FSOC for their work on this comprehensive report, which I support.”); Press Launch, SEC, Chair Gary Gensler, Statement Before the Financial Stability Oversight Council (October 21, 2021),  (stating “I support this thoughtful and thought-provoking report discussing how climate risk could manifest and actions Council members are taking within the authorities and mandates[,]” and highlighting the SEC’s two “important” tasks addressing local weather danger disclosures—the primary coping with public firm disclosures and the second addressing naming funds such as “sustainable” or “green”).

6   Jason Halper, et al., “Investors and Regulators Turning up the Heat on Climate-Change Disclosures,” Harv. L. Sch. F. ON Corp. Governance (July 24, 2021), .

7   Henry Engler, U.S. regulators seen developing ‘green taxonomy’ to provide guidance to financial firms, Reuters (July 14, 2021),;  Jean Eaglesham and Anna Hirtenstein, “ESG Disclosure Rules From Europe Challenge U.S. Fund Managers,” WSJ (Mar. 22, 2021), ; Press Launch, SEC, Appearing Chair Allison Herren Lee, Public Input Welcomed on Climate Change Disclosures (Mar. 15, 2021), ; Gabriel Rosenberg, Margaret Tahyar, and Betty Huber, “Commenters Weigh in on SEC Climate Disclosures Request for Public Input”, Harv. L. Sch. F. ON Corp. Governance (July 24, 2021), .

8   Press Launch, State Avenue, State Street ESG Solutions Provides Risk Analytics Enabling Climate-related Risk Disclosures and Reporting (Mar. 8, 2021),;  Press Launch, Blackstone, Blackstone to Acquire Sphera, a Leading Provider of ESG Software, Data, and Consulting Services, From Genstar Capital for $1.4 Billion (July 6, 2021),; MSCI ESG Metrics, MSCI,  (final accessed Oct. 25, 2021); Firm ESG Danger Rankings, Sustainalytics’ ESG Risk Ratings Offer Clear Insights into the ESG Risks of Companies, Sustainalytics,  (final accessed Oct. 25, 2021).

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